What is the Spread in Trading and how does it affect our profits

The spread in trading is the difference between the buy and sell price of an asset. It is one of the basic terms of operations and investments in Forex.

What is a spread in Forex, or in any financial asset, is a key question that you must know how to answer if you want to operate in these markets. To know more read what is spread in forex.

What is the Forex Spread

When you come across this term, you may ask yourself what is a spread on the stock market?

▶ The spread is the difference between the purchase (ask) and sale (bid) prices of a certain financial asset.

From an online broker's point of view, spread trading is one of their main sources of income, along with other commissions for trading.

The spread, also known as spread or fork, can be fixed or variable, but most online brokers offer variable spreads.

For most of us, when we buy or sell something, price is usually a key factor to consider in our decision-making process. However, not always enough importance is given to the transaction costs involved in making that sale or purchase.

This is true for both trading and selling a house or buying a car. When trading Forex, one of the key transaction costs is, of course, the Forex spread.

How to calculate the spread in Forex

As we have already mentioned, the price range in Forex is the difference between the purchase price and the sale price, and is measured in pips or points. In the Forex market the pip is the fourth digit after the decimal point in an exchange rate.

↳ Let's say the prices at which the EUR USD pair is trading are 1.1234 / 1.1235. The difference between the bid and ask price is 0.0001. This is equivalent to saying that the spread of this pair is 1 pip.

The size of the spreads varies for each broker and will depend on the volatility and volumes traded on an instrument. The most traded currency pair is the euro dollar and, in general, the lowest Forex spread is that of the EURUSD.

Factors influencing spreads on the Stock Market

The spreads depend on the underlying asset. In trading, the asset spread will be lower if:

✔️ The asset is traded a lot

✔️ The market is very liquid

✔️ There are many traders

In less liquid markets, such as natural gas, trading spreads are much higher.

Brokers do not guarantee fixed spreads during periods of greater market volatility or macroeconomic announcements, which as a general rule, is the time when they are highest.

Can you trade without spreads on Forex?

Are there trading accounts without spread?

Trading accounts without a dealing desk or ECN accounts are accounts with no trading fees for the broker. In this type of account you only have interbank commissions, for example 0.1 - 0.2 pips on the euro dollar.

In this case, the broker will charge a fixed fee per negotiated contract, because, of course, no one gives access to the market for free and the broker also has to get remuneration.